Taxes, dividend yields and returns in the UK equity market

Morgan, G. and Thomas, S. (1998) Taxes, dividend yields and returns in the UK equity market. Journal of Banking and Finance, 22, (4), 405-423. (doi:10.1016/S0378-4266(98)00002-8).


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The higher rate of taxation on dividend income relative to capital gains has been offered as an explanation for the positive relation between stock returns and dividend yields among US firms. In the UK the relative tax rates are the reverse of those in the US. Thus, UK data provides an independent test of the tax-based approach to explaining the relation between stock returns and dividend yields. We find that high yielding stocks earn positive risk adjusted returns, whereas low yielding stocks earn negative risk adjusted returns. We also detect evidence of non-linearity in the performance of zero-dividend stocks. Controlling for firm size, seasonality and market risk we find a significant positive relation between dividend yields and returns. We conclude that the evidence is inconsistent with a tax-based explanation.

Item Type: Article
ISSNs: 0378-4266 (print)
Related URLs:
Keywords: UK dividend yield, size, seasonality, taxes
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HJ Public Finance
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 37365
Date Deposited: 01 Mar 2007
Last Modified: 06 Aug 2015 02:32

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